Berkshire Hathaway’s Operating Earnings Decline 11% During Second Quarter 2017

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Berkshire Hathaway’s Operating Earnings Decline 11% During Second Quarter 2017
By Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0], via Wikimedia Commons

After the market closed today, Berkshire Hathaway released its second quarter earnings report for 2017.  Its operating earnings declined by 11%  primarily as a result of a loss of $22 million in its insurance businesses as compared to a profit of $337 million during the second quarter of 2016.  In addition, there was a negative $407 million for corporate interest expense vs. a positive $32 million in the corresponding quarter last year. Berkshire’s earnings from its railroad, utilities, and energy businesses increased by 18% compared to last year.

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Net income, including investment and derivative gains and losses, declined by 15%.

As of June 30, 2017, Berkshire had $100 billion in cash and its book value, which increased by 6.2% since yearend 2016, equaled $182,816 per Class A equivalent share.  At its record closing price today of $270,000 per Class A share, Berkshire’s price to book value ratio equals 1.48, which is below its 30 year average of 1.58.  Warren Buffett has previously stated that he would buy back shares of Berkshire if the price to book value ratio dips below 1.2.

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At today’s closing price of $270,000 per Class A share, Berkshire has a market capitalization of $444 billion, which is the sixth largest company behind only Apple ($815 billion), Alphabet (Google) ($655 billion), Microsoft ($561 billion), Facebook ($493 billion) and Amazon ($474 billion).

(Note:  After-tax corporate interest expense included foreign currency exchange rate losses in the second quarter and first six months of 2017 of $342 million and $399 million, respectively, with respect to the revaluation of the Euro denominated debt. In 2016, after-tax corporate interest included foreign currency exchange rate gains of $101 million in the second quarter and losses of $60 million in the first six months. Excluding these foreign currency gains and losses, after-tax corporate interest expense in the first six months of 2017 and 2016 was $131 million and $121 million, respectively. The increase was attributable to increased average outstanding borrowings.)

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David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.

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